*3.3.1 FDR*

**2.1 Liquidity risk**

*Banking and Finance*

**2.2 Credit risk**

**2.3 Operational risk**

The definition of liquidity risk can be broadly defined as the ability to meet cash at

an appropriate cost. Liquidity is important for banks to carry out their business transactions, address urgent needs, satisfy customer demands for loans, and provide flexibility in achieving attractive and profitable investment opportunities. For that purpose, Islamic bank needs to implement liquidity management practices in order to mitigate the potential risk occurrence. According to Sholikhah [22], banking liquidity management is about how banks can fulfill both current liabilities and future liabilities in the event of an asset liability withdrawal or repayment. In other words, the liquidity risk appears in accordance with the agreement which has not been agreed (unexpected) previously. Therefore, bank liquidity management is required to liability management through which banks can convince the depositors concerning their fund withdrawal at any time or at maturity. Hence, looking at the potential mismatch between assets and liabilities, the banking sector needs to monitor the potential

liquidity risk through its financing-to-deposit ratio or FDR variable.

Banks Association [23], credit risk is the risk of losses due to failure of counterparties to fulfill their obligations. Usually this risk comes from several banking functional activities such as credit or financing. Nowadays, the productive assets of banks are dominated by loans, while the most important sources of bank funds are from third-party funds or DPK so that if there is a significant increase in credit risk to banks, the influence on bank performance will be severe as the pressure from deposited funds. Hence, due to connected sources between deposited and disbursed funds, the potential loss due to financing activities must be controlled

by monitoring nonperforming financing or NPF variable.

potential operation risk in Islamic banking.

**3.1 Research objective and data type**

**3. Data and methodology**

**54**

Credit risk is a major source of financial systems. According to the Indonesia

Operational risk affects basically the ability of banking sector to generate profits and its capacity to adjust revenues and expenses. Operational risks are triggered from banking sector activities in the midst of diversity and connectivity. Given that more diverse and competitive banking sectors exist, the banking sector tends to excessively generate assets as profit maximization motive. However, the lack of system and human capacity necessitates more investment or additional cost; otherwise, there will be less competitive and market penetration. Hence, the banking sector needs to properly monitor the ratio between its cost and revenue to ensure its sustainability and continuous profitability. The BOPO is variable to identify the

The object in this study is Islamic banking in Indonesia. Its risks are analyzed by time series data published by Bank Indonesia and the Financial Services Authority Indonesia. The data spanned from January 2010 to August 2018 due to the new phase of the new normal of global economy where the global economy starts to increase after the global financial crises indicated by the growth of East Asian

FDR is a ratio that shows banking intermediaries and proxies to the liquidity of Islamic banks. The FDR is computed by dividing the total amount of financing with the total third-party funds. The FDR in Islamic bank is used to measure the capabilities of Islamic banking to meet the repayment of deposits upon maturity or without any delays. If the FDR is more than 1, it means that the total financing provided by the bank exceeds the funds collected from depositors. This situation has the potential risk to cause liquidity risk for Islamic banks. The FDR is formulated as follows:

$$FDR = \frac{Total\text{ }Financing}{\text{Total }Third\text{ }Partly\text{ } Funds\text{ } collected} \times 100\% \tag{1}$$
